The hotel industry has had a major shock to its system due to COVID-19 pandemic. Whether this has changed your plans to sell or hold a hotel in portfolio, you will want to know these pricing strategies.
Myth # 1: The higher I price my hotel, the more money I will get for it
Market conditions have just changed very rapidly from a seller’s market to a buyer’s market. Hotel buyers will be considering how quickly demand will return to a market, and how well positioned a hotel is to capture that demand. While strong performance in 2019 and prior will show favorably that the hotel performance can rebound, prospective buyers will adjust pricing expectations based on 2020 and 2021 projections.
The negotiation process is not a set compromise between two values. Asking too high of a price relative to current market expectations, gross revenues, and net operating incomes will simply mean hotel buyers will ignore the offering. In today’s world of freely available information to compare investment options, every hotel buyer comes fully informed. Buyers consider room revenue, net operating income, price per key, age, condition, market factors, and PIP costs, when they evaluate potential hotel investments. Depending on factors such as brand, condition, and most importantly location, any particular buyer will determine what revenue multiplier and capitalization rate they are willing to pay for any particular hotel acquisition.
Myth # 2: I don’t need to lower the price, just bring me offers
Buyers aren’t even interested in looking at hotel that is listed too far over a reasonable revenue multiple or cap rate. The thinking is that ‘it is a waste of time to deal with it because the seller is un-realistic’. When a seller says they will consider a price that is dramatically lower than the asking price, say $1,000,000 less than an asking price of $4,000,000, but won’t lower the asking price, they are greatly reducing the potential level of interest in their hotel.
Myth # 3: I can always reduce the price later
Pricing a hotel too high at the first marketing of the hotel, wastes the opportunity to create interest that normally would be there when a hotel is first placed on the market. The longer a hotel is on the market the less interest it receives, even when the price is reduced. If the price keeps falling in small increments, then even when the price aligns with performance of the hotel, if it’s been on the market too long, buyers are fatigued by it. Buyers also may assume that something must be wrong with the hotel if it has been on the market for a year or more.
Myth # 4: The ‘right’ buyer will pay my price
While it’s true that different potential investors will have different motivations for acquiring specific assets, in today’s world it is extremely unlikely to see a huge difference in price from different buyers as long as the hotel is fully marketed by MBA Hotel Brokers, or a competent hotel brokerage firm. The larger price differential we see today is the price a very experienced and financially strong buyer may offer on a hotel, versus what a lesser qualified buyer, who is just qualified enough, may pay. In some sales however, it serves the seller’s interest better to work with the more qualified buyer, when certainty of the sale closing timely is important. Even though the buyer with more cash down and greater experience and capabilities may pay less, sometimes reducing the risks of a transaction falling apart are more important than the price difference that a less qualified buyer may pay.
Till’ Next Time,
– Charlie Fritsch